Next year, Chicago voters may decide the fate of the “Bring Chicago Home” ordinance, a so-called “mansion tax” supported by Mayor Brandon Johnson to raise revenues from high-end real estate sales to pay for city homelessness services.
If approved, Chicago would join cities like New York, Los Angeles and Evanston who’ve turned to the tax in recent years to pad their budgets — all to different effects.
Currently, all property buyers pay a flat 0.75% rate, regardless of the sale price. The Bring Chicago Home proposal, first pitched by housing advocates in 2018, would more than triple that one-time tax for properties over $1 million, including commercial properties. Proponents predict the tax could generate more than $160 million in annual revenue for the city to spend on homelessness and rehousing efforts.
Illinois law only allows municipalities to restructure their real estate transfer taxes if voters approve it in a binding referendum. The Chicago City Council still must approve the ballot measure before it reaches voters, and the language and specific tax rates they propose may change. But as currently written, Bring Chicago Home would charge a 2.65% tax on all property sales of more than $1 million.
In the end, most of the American cities that imposed graduated real estate transaction taxes reaped sharply higher revenues. But they experienced rocky political and legal paths to get there.
In 2018, the Evanston City Council created a ballot question asking whether residents wanted to raise taxes on the sales of properties valued over $1.5 million.
“The basic argument is that if you can pay more than $1 million to buy a house, then you can afford to chip in a bit more to make sure we have funds to meet the basic needs of government,” said Evanston Ald. Devon Reid, who pushed for the idea in 2017 when he was running for City Clerk.
Voters approved the Evanston initiative by a margin of about 53% to 47%, and the tax structure went into effect Jan. 1, 2019. It maintained the suburb’s existing 0.5% tax on property sales up to $1.5 million but raised the rate to 0.7% for sales valued between $1.5 million and $5 million and 0.9% on sales of more than $5 million.
In the first year, Evanston’s real estate transfer tax revenue dipped from about $3.8 million in 2018 to $2.7 million in 2019, budget records show.
But collections from the tax bounced back to about $3.3 million in 2020, and as the region’s housing market heated up in 2021, revenue nearly doubled to $6.2 million. Revenues leveled out to around $5.5 million in 2022, as higher interest rates began to cool the market.
“As far as we have been able to tell, there has been no significant impact on our [real estate] market,” said Reid, who served as City Clerk until 2021 when he was elected alderman of Evanston’s 8th Ward. “But it’s had a huge impact in raising additional revenue for the city.”
Evanston’s median home sale price has grown from about $301,000 in January 2019 to $388,000 in January 2023, and the city’s annual home sale activity has slowed somewhat since 2020, according to data from the brokerage firm Redfin. The real estate site RocketHomes categorizes Evanston as a “seller’s market.”
Evanston’s commercial real estate market also survived the transition, data show. Officials in January reported a 10% retail vacancy rate and an 11% office vacancy rate in the suburb – about half of downtown Chicago’s post-pandemic vacancy rate.
Evanston officials did not earmark the tax dollars for any specific spending category, like Chicago would under the Bring Chicago Home proposal. But last year, the Evanston City Council dedicated $1 million per year from the real estate transfer tax fund to the city’s landmark reparations initiative. The program offers $25,000 grants for mortgage assistance, renovations or a down payment for eligible residents.
“Our reparations programming is based around unfair historic housing practices … and this funding is going toward supporting buying housing for African American residents of Evanston,” Reid said. “Similarly, I think Mayor Brandon Johnson’s policy will disproportionately [positively] impact Black residents in Chicago.”
More recently, voters in Los Angeles last November approved Measure ULA to raise the city’s tax on pricey property sales and use the money to help stem the city’s homelessness crisis.
Since April 1, property sold at $5 million or more has been taxed at a rate of 4%, with properties over $10 million taxed at 5.5%. The higher rates are imposed on top of an existing 0.45% base rate charged on all real estate sales in Los Angeles.
That legal snafu was cited at last week’s hearing of the Chicago’s Housing and Real Estate Committee. In order to avoid a lawsuit, Marisa Novara, the city’s housing commissioner, said city policymakers should consider only taxing the amount of each sale that exceeds $1 million, instead of taxing the entirety of every sale the way Los Angeles does — and the way Bring Chicago Home would as currently written.
“The tax that they instituted [in Los Angeles] was flat, and they are being challenged, so the dollars they are collecting, they cannot spend,” Novara said. “We don’t want to do that. We want to spend our dollars immediately.”
Los Angeles saw its luxury real estate market draw to a near standstill in the month after the tax went into effect, following a frenzied push to complete deals before the implementation date. During its first month, the city was reported to have collected less than $4 million from the tax, which was projected to bring in more than $900 million per year.
Chicago could meet the same fate if policymakers don’t “hit the pause button” and study the Bring Chicago Home plan more thoroughly, said Michael Glasser, president of the Neighborhood Building Owners Alliance of Chicago.
A new tax would put a damper on buyers, he argued, particularly for less experienced real estate entrepreneurs who are looking to break into the industry or buy multifamily buildings in communities of color.
“The city should look at their own operations … to see if they’re going about things as efficiently as can be before putting the entire burden on the private market,” Glasser said. “This is not productive to the goal of promoting intergenerational wealth among the multifamily owners in the communities that we want to restore.”
Other cities and states with graduated real estate transfer taxes
A year after Evanston voters passed their referendum, legislators in New York state opted to raise taxes on high-end real estate sales for both buyers and sellers in New York City.
Under the updated structure, sellers pay a 0.65% tax on commercial property sales above $2 million and residential sales above $3 million, while sellers of all other properties pay a 0.4% tax. A new sliding tax scale charges buyers up to 3.9% of the cost of any property purchased for more than $25 million.
Collections from the city’s real estate transfer tax were about $700 million in 2019 and 2020. They sank to less than $445 million in 2021 before rocketing to nearly $982 million in 2022, state budget data show.
Results were more immediate in Connecticut, where a 2019 legislative initiative raised the state’s real estate transfer tax to 2.25% for any value of a property sale that exceeds $2.5 million. Revenues from the real estate conveyance tax jumped from about $176 million during the 2019-20 fiscal year to $385 million and $384 million during each of the next two fiscal years, respectively, budget records show.
The following other cities and states have enacted graduated real estate transfer taxes:
- In 2020, Washington state imposed a graduated real estate transfer tax schedule ranging from 1.1% for property sales below $525,000 to a 3% rate for properties above $3,025,000. Previously, the state charged a flat 1.28% tax rate on all property sales.
- The District of Columbia charges a 1.1% tax on the sales of properties for less than $400,000 and a 1.45% rate on sales above $400,000.
- New Jersey collects real estate transfer fees on a sliding scale, from a 0.4% tax on sales below $150,000 to a 1.2% tax on property sales of more than $1 million.
- Hawaii taxes real estate sales on a similarly sliding scale, between a 0.15% tax on sales below $600,000 and a 1.25% tax on property sales of more than $10 million.
- Vermont charges a marginal tax rate of 0.5% on the first $100,000 of any property sale, plus a 1.45% rate on any additional sale value.